Put CD Laddering to Work for You

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Saving money and watching your account grow is a great feeling. But if you're saving your money in a traditional savings account with a low interest rate, your money is likely not growing as fast as you'd hope. If you're wanting a higher rate, a CD is one option. CDs offer higher interest rates with the stability of a guaranteed investment, and when you ladder your CDs, they can offer flexibility of quick cash when you need it.

What is a CD?

A CD, also known as a Certificate of Deposit, is a simple investment product available through most banks. The term and interest rate of CDs are set by the financial institution, based in part on current interest rates. The interest rate offered is good for the duration of the investment.

You choose how much money you’d like to put into a CD and agree to the terms offered. You’ll receive regular statements to help you keep track of your money, just like a savings account. CDs earn compound interest, which means the interest you earn is added to the balance so it can also earn interest.

CD Pros and Cons

A CD is a good option if you are concerned about volatility in the stock market. Your investment will be safe; the rate of return on a CD is guaranteed. CDs offered by Pinnacle Bank are also insured by the FDIC up to $250,000 per depositor. Investing in a CD will also give you a higher rate of return than keeping your money in a traditional savings account.

Compared to other investment products like stocks or mutual funds, a CD is a short-term commitment. However, you must keep your money in the account for the duration of the term, or pay the penalty for early withdrawal. Which makes your money less accessible than that in your savings accounts.

The CD Ladder Method

Since you would pay a penalty to withdraw money invested in a CD earlier than its maturity date, it might not be advantageous to invest all your available funds in one CD and hope you don’t need that money until the CD matures. CD laddering, however, eases this problem.

With CD laddering, you would divide up the money you’d like to invest and open separate CDs with different dates of maturity. This way, instead of waiting two years for one CD to mature, you could have a CD maturing every few months. A CD ladder gives you access to some of your money at set intervals, while you earn a higher rate of interest than you would by keeping the money in a savings account.

How to Build Your CD Ladder

To get your ladder off the ground, decide if you want to go for a long-term or short-term approach.

For a short-term CD ladder, divide your money into four equal parts. Invest each in a different CD with evenly spaced maturity dates: three months, six months, nine months and 12 months. This method gives you access to your money without penalty every three months.

To build a long-term CD ladder, divide your funds into three equal parts. Invest each in a different CD with evenly spaced maturity dates: one year, two years and three years. Now you have three CDs, one maturing every year for the next three years.

Every time one of your CDs matures, you can decide what to do with that money. You may want to take money out to cover expenses or you can choose to reinvest it. To keep your CD ladder going, once one of your CDs matures open another CD for the longest term in your ladder. This way your ladder will stay on the schedule you've established.

If you have questions about CD laddering or any savings or investment products, contact your local Pinnacle Bank. We are here to help you make the most of your money and can offer expert guidance.


All terms used in this article are for example and educational purposes only and do not necessarily reflect the CD terms available from Pinnacle Bank.